Malaysian billionaire is kingmaker in battle for a leading Hong Kong bank

Tan Sri Quek Leng Chan is known for his savvy corporate moves.

PHOTO: The Star

TYCOON Tan Sri Quek Leng Chan known for his savvy corporate moves, could emerge as "kingmaker" at the Bank of East Asia (BEA) of Hong Kong, a US$100bil company by assets which is going through a shareholder tussle between two of its other large shareholders.

Activist US hedge fund Elliott Management Corp has launched an attack against BEA's Sir David Li, the 76-year-old chairman and chief executive, who is the grandson of the bank's founder.

Li is in a vulnerable position, as his family stake only stands at 9 per cent. Previously, Li had the support of other large institutional shareholders in BEA but that support could be waning.

Through letters to shareholders since early last month, Elliott claims the bank could be run better and is pressuring for a management shake-up or a sale of the bank, all intended to maximise shareholder value.

The disparate shareholder base of BEA makes Elliott's move a game changer and interestingly, puts Quek in a sweet spot.

Quek, through his Hong Kong-listed flagship Guoco Group Ltd, first bought into BEA in 2009, increasing his stake over the years to 14 per cent at present.

Elliott, the hedge fund that was in the news recently for winning a protracted battle against the Argentinian Government over defaulted bonds, owns 7 per cent of BEA.

Two other foreign institutions are the largest shareholders - Sumitomo Mitsui Banking Group Inc and Spain's Criteria Caixa SA, each owning around 17.2 per cent.

But where do all these parties stand in relation to Li?

It has been reported that Li has always feared Guoco's entry into BEA.

In 2014, Li had launched a private placement of 10 per cent of BEA shares to Sumitomo Mitsui. The latter subsequently increased its stake and is said to be friendly to Li. Interestingly, Elliott has also questioned the rationale of this placement exercise.

Spanish catalyst

Last December, a share sale transaction took place, which possibly catalysed the changes happening at BEA today. CaixaBank SA, a Spanish banking group which had first bought into BEA in 2007, sold its shares to its parent Criteria Caixa. The left hand-to-right hand share sale has a story behind it.

For some time, it has been said that Li had the tacit support of CaixaBank, which had agreed to vote along with BEA's board on a number of matters, including examining offers to buy into BEA.

This agreement is said to have disintegrated when CaixaBank flipped its block to its parent, as the shareholder agreement was no longer valid. But why did CaixaBank do that?

A newspaper report has speculated that CaixaBank was not happy with BEA's decision on the 10 per cent share placement to Sumitomo, which had a dilution effect on all existing shareholders.

Meanwhile, Elliott believes that BEA is undervalued and could fetch a price of around HK$60 a share, a huge premium to the HK$26.40 the stock is trading at now.

BEA's diversified shareholding structure has always been seen as a gateway to an acquisition or even a hostile bid.

Li is in a vulnerable postition as his family stake only stands at 9. Li is in a vulnerable postition as his family stake only stands at 9 per cent.

Herein lies the opportunity for Quek. Guoco's 14 per cent block is now all the more valuable. Guoco can lend its support to Elliott and possibly the Spanish in order to wrest control of BEA.

One paper had speculated that Guoco may be looking to exit BEA, possibly alongside another large shareholder. However, this is unlikely.

When contacted, a Guoco official says: "BEA is one of the stocks in Guoco Group's long-term investment portfolio."

This signals that Quek is unlikely to be a seller of BEA and observers do not rule out the possibility of Quek launching a takeover of BEA in the future.

"Quek is more likely to have a go for a bank like BEA, which trades below book value than any local bank like Public Bank Bhd (PBB), which is so much more expensive," says an investment bank. PBB trades at a book value of around 2.15 times.

BEA is a prized target.

It trades at 0.8 times its book value, has consolidated assets of HK$781.4bil (US$100.8bil) and is Hong Kong's largest independent local bank.

"Quek has a knack of buying low and selling high," notes an industry player.

His business philosophy is said to be "never to fall in love with your business and selling when the price is right".

Recall that Guoco had bought Dao Heng Bank in the early 1980s. In 2001, it sold its 71 per cent controlling interest to Singapore's DBS Bank for US$5.4bil or RM16.7bil. At that time, the sale of Dao Heng was valued at 3.5 times book value.

Guoco, Elliott on the same page?

In 2013, Quek made an attempt to privatise Guoco. It was speculated that one of the reasons for this was to facilitate a takeover of BEA. However, Quek failed in both privatisation attempts, as minority shareholders of Guoco blocked the deals.

It is not known if Quek is working alongside Elliott or agrees with the hedge fund's moves.

But one common factor is that the hedge fund is also an investor in Guoco.

Elliott owns 9.1 per cent of Guoco.

Banking is Quek's mainstay, so it's likely he will stay invested in BEA, says an insider.

Besides BEA, the other banking interests in Quek's sprawling empire are Bursa Malaysia-listed Hong Leong Financial Group Bhd (HLFG)- the holding company that owns 64.4 per cent of Hong Leong Bank Bhd (HLBB). HLFG also has interest in insurance and investment banking.

HLBB, in turn, has a 20 per cent strategic shareholding in China's Bank of Chengdu Co Ltd that was acquired in 2009.

Another Malaysian angle to the BEA saga is that it owns a sizeable stake in a Malaysian bank. BEA owns 23.5 per cent of Affin Holdings Bhd, making it the second-largest shareholder after the Armed Forces fund, Lembaga Tabung Angkatan Tentera. BEA acquired this stake back in June 2007.

China play

Hong Kong-based banks are attractive acquisition targets because of their access to China, where they have branches and banking licences are limited.

It has been reported that among Hong Kong banks, BEA is said to have the largest exposure to assets in China at 30 per cent of its book.

Other family-owned banks in Hong Kong have struck deals with foreign investors in recent years. Wing Hang Bank Ltd, for example, was sold to Singapore's Oversea-Chinese Banking Corp Ltd in a deal worth about US$5bil or 1.9 times book value, while Chinese conglomerate Yuexiu Enterprises struck a deal for 75 per cent of Hong Kong's Chong Hing Bank for 1.5 billion Hong Kong dollars (US$193.5mil) or 2.4 times book value.

The last one to sell for close to three times book value was Wing Lung Bank Ltd, bought by Chinese lender China Merchants Bank for US$2.47bil in 2008.

However, banking industry players reckon that it is unlikely that BEA can fetch those kinds of valuations in the current market.

BEA posted a 20 per cent drop in pre-tax profit to HK$6.7bil for the financial year 2015.

Quek is unlikely to pay any significant premium for any assets, BEA included. Remember in 2013, he failed to privatise Guoco despite raising the offer price from the initial HK$88 in December 2012 to HK$100 per share four months later.

In the same year, his attempt to take private Hong Leong Capital Bhd at RM1.71 per share was thwarted.

Interestingly, the share prices of both companies rose above what Quek's companies had offered to take them private, an indication that investors had valued these stocks much higher.

Hypothetically speaking, if Guoco is able to get Criteria Caixa and Elliott on its side, then this group would have close to 40 per cent of BEA and would be able to wrest control of it.

If Guoco works alone, then it would have to fork out at least HK$6bil for the shares it does not own in BEA, although realistically, it would have to pay a premium for such a takeover.

Guoco's current cash pile stands at around US$2.64bil or HK$20.15bil based on Bloomberg data.

Quek, Malaysia's third-richest man with a net worth estimated at US$5.3bil (RM22bil), will be watched closely for a possible BEA play.